Fed Cuts Rates as US Economy Shows Signs of Cooling, SNB Holds Steady
The final stretch of the year has delivered two closely watched central bank events. The FOMC surprised markets with a reduction in its policy rate while the Swiss National Bank prepared for its own meeting under far more predictable conditions.
In the US, the Federal Reserve cut the target range for the federal funds rate by 25bp to a range of 3.5-3.75%. This marked the latest step in a long process of easing that began after policy rates peaked at 5.5% last year. What drove this move was a steady softening in economic indicators that, while not alarming, signaled that the period of exceptionally tight financial conditions had run its course.
Job gains in the US have slowed over the year and the unemployment rate has edged higher since September. More recent data offer a consistent picture of a labor market that is cooling but still functioning well. Inflation has risen slightly from earlier in the year and remains somewhat elevated. However, it has not shown signs of accelerating. The Fed judged that downside risks to employment have increased in recent months and that supporting labor market stability is becoming more important. With inflation still above its goal of 2% but not rising in a persistent way, the Committee concluded that a modest rate cut would improve the balance of risks.
The Federal Reserve also introduced a significant change to its balance sheet operations. It determined that reserve balances had fallen to ample levels and announced that it would begin purchasing shorter term Treasury securities as needed in order to maintain sufficient liquidity. This step, which could amount to tens of billions of dollars per month, is designed to stabilize money markets and ensure smooth monetary policy transmission. The change was notable because it injects additional liquidity at a time when markets are already adjusting to lower policy rates. The effect was visible immediately as Treasury yields eased, equity markets firmed and the dollar softened.
Federal Reserve Chair Jerome Powell described the economic outlook as highly uncertain. He indicated that the Committee is prepared to wait for additional data before deciding whether further easing is appropriate. A backlog of economic reports caused by a government shutdown means that key information such as employment and inflation readings will arrive in clusters over the coming weeks. Powell emphasized that the path of policy will depend heavily on how these numbers evolve and how the economy responds to the cumulative rate cuts delivered since last year. He also noted that productivity has been stronger than expected and suggested that investments in artificial intelligence and data infrastructure may be contributing to that trend, although its scale remains uncertain.
Financial markets reacted cautiously to the Federal Reserve’s rate cut. The dollar softened against major currencies as investors interpreted the move and Powell’s comments as a signal that policy will remain patient in the near term. Equities showed a mixed performance, with technology stocks and other growth sectors weakening while some rate sensitive areas were more stable, reflecting uncertainty about the broader economic outlook. Digital assets, including Bitcoin and Ethereum, declined following the announcement, as investors remained cautious despite the Fed’s liquidity measures, and overall trading volumes stayed moderate while markets awaited upcoming economic data.
While the Federal Reserve adjusted policy, the Swiss National Bank entered its December meeting facing a very different situation. A Bloomberg survey found no economists expecting a rate cut and market pricing placed the odds of one well below 10%. This confidence stemmed from the clear stance taken by Chairman Schlegel who repeatedly stressed that the central bank focuses on medium term price stability rather than reacting to short term inflation movements.
Inflation in Switzerland fell from 0.2% in August and September to 0% in November. This level is fully consistent with the Swiss National Bank's price stability definition of 0-2%. Because inflation in Switzerland often moves in response to exchange rate fluctuations and energy prices, policymakers view these shifts as temporary and unlikely to have lasting economic effects. As a result, they see little need to make abrupt policy adjustments in response to these swings. Schlegel also made clear that although the Swiss National Bank retains the ability to push rates back into negative territory, doing so would require unusually severe conditions.
Understanding the Swiss National Banks decisions becomes clearer when viewed through the idea of a reaction function that links interest rate choices to a few key variables. Last months inflation relative to the previous policy rate and the size of the last rate change tend to carry the most weight. Since the central bank typically adjusts slowly and since inflation remains low and stable, the most likely decision is to maintain steady policy.
Today’s Swiss National Bank meeting serves as the final major economic event of the day. With inflation contained, moderate economic growth and a stable currency, the institution has room to leave policy unchanged. Markets will pay attention to any remarks on future risks, but the expectation remains that stability will be the theme.
Analysis by Coach Angel
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